Monday, September 5, 2011

KLCI Investment Strategy – CY2Q11 Report Card – Disappointing

FBM KLCI Target – 1,610
September 5, 2011


CY2Q11 Report Card
# CY2Q11 reporting season was again disappointing, for the second consecutive quarter.

# Among HLIB universe, 13 were below expectations while seven surprised on the upside. Against consensus, 15 were below while nine came in above.

# Sectors that disappointed were banking (NIM compression and slower non-interest income), transport (higher fuel costs), building material (higher raw material costs) and technology (higher input costs). On the other hand, the plantation (higher production) and construction (work progress pick up) sectors were ahead of expectations.

# Major earnings downgrade was MAS while downgrades in other big/mid-caps were Boustead, CIMB, RHB Cap and YTL Power. Other than MAS, significant earnings downgrades were seen in Ann Joo, CSC Steel and JCY.

# HLIB had 12 earnings downgrades and five earnings upgrades. Although the number of downgrades were lower than post CY1Q11 results (18), the revision ratio was higher at 2.4x (i.e. for every earnings upgrade, there were 2.4 downgrades) vs. 2x.

# Thus, our 2011 and 2011 EPS growth forecasts have been cut to 11.3% and 11.4% from 12.1% to 12.3%, respectively.

Outlook
# Although earnings risk has increased, we are not “jumping the gun” and call for a global recession and believe there are still ample domestically driven factors that would sustain corporate earnings. They are ETP gaining traction, wealth creation culminating in continued consumption amidst rising consumerism and Petronas contract awards.

# Among sectors that have relatively more resilient earnings are: 1) construction will be supported by rolling out of projects; 2) property by huge unbilled sales; 3) telcos with added advantage of high yields; 4) power, as worst is over for TNB while its share price has more than discounted the recent earnings disappointment; 5) plantation whereby CPO prices have held up well despite recent volatility, barring outflow of financial demand; and 6) banking as asset quality is still strong while the impact of slower loans and non-interest income growth is lower vis-à-vis provision.

Risks
Domestic
- fiscal position, transformation execution risk and General Election;

External
– potential global recession, China over tightening and lingering European debt woes.

KLCI Target
With heighten risk aversion and earnings downgrade, we have lowered our year-end FBM KLCI target to 1,610 based on lower P/E of 14x 2012 earnings.

Stocks preference
# Defensive stocks under HLIB universe for risk adverse investors.

# For investors who have higher risk appetite amidst volatile global markets, we prefer stocks with domestically driven earnings, undemanding valuations and decent liquidity like Boustead, BToto, DRB, Maybank and WCT.



Source: HLIB Research

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